Bribes to Employees of State-Owned Corporations May Trigger FCPA Liability
On May 18, 2011, Central District of California Judge James V. Selna ruled that a state-owned corporation may qualify as an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et. seq. (the “FCPA”).1 With that holding, Judge Selna denied a motion to dismiss filed by several individuals indicted for bribing employees of state-owned companies in China, South Korea and the United Arab Emirates. Judge Selna also rejected the defendants’ argument that the term “foreign official,” as used in the FCPA, is void for vagueness.
In United States v. Carson, several individual defendants were indicted on ten separate counts of violations of, and conspiracy to violate, the FCPA. The indictment alleged that the defendants made $4.9 million in corrupt payments to officers and employees of foreign, state-owned corporations involved in petroleum exploration and power generation. In their motion to dismiss, the defendants argued that a state-owned corporation never could be considered an instrumentality of a foreign government under the FCPA, noting that Congress did not define the term when it enacted the FCPA.
Judge Selna rejected the defendants’ position, and held that whether a state-owned corporation can be considered an instrumentality is a question of fact that depends upon the nature and characteristics of the entity. For example, Judge Selna noted, a foreign state’s mere investment in a business entity likely would be insufficient to transform the business into a government instrumentality. However, such a transformation would occur where other factors “indicate the entity is being used as an instrument to carry out governmental objectives.”
Judge Selna went on to list factors to be considered in determining whether a state-owned entity is “a modality through which a government may conduct its business,” even if it is not a governmental agency or department: (i) the foreign state’s characterization of the entity and its employees; (ii) the foreign state’s degree of control over the entity; (iii) the purpose of the entity’s activities; (iv) the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercised exclusive or controlling power to administer its designated functions; (v) the circumstances surrounding the entity’s creation; and (vi) the foreign state’s extent of ownership of the entity, including the level of financial support that the state provides to it. Judge Selna pointed out that these factors are non-exclusive, and that no factor alone is dispositive.
Judge Selna also rejected the defendants’ argument that the lack of a definition for the term “instrumentality” rendered the FCPA unconstitutionally vague. The Judge reasoned that even without a clear definition for the term, an ordinary person can understand what conduct the FCPA prohibits, particularly because the FCPA focuses on the actor’s intent.
Judge Selna’s decision follows the April 20, 2011 decision by fellow Central District of California Judge A. Howard Matz, who also ruled that a state-owned corporation can be considered an instrumentality under the FCPA (United States v. Noriega).2 Of the two decisions, Judge Selna’s is likely to be more influential given its broader holding and discussion of relevant factual questions.
Although there remains a dearth of case law interpreting key terms of the FCPA, Judge Selna’s and Judge Matz’s recent opinions suggest that the debate over whether a state-owned entity can be considered an instrumentality of a foreign government under the FCPA will be settled in the U.S. government’s favor. Although each case will stand on its own facts, companies doing business overseas should expect the Department of Justice to interpret the term “instrumentality” very expansively. As a result, companies should be very cautious when dealing with any entity owned in whole or in part by a foreign government.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.
1 United States v. Carson, et al., Case No. 8:09-cr-00077-JVS, Dkt. No. 373 (C.D. Cal. May 18, 2011).
2 United States v. Noriega, et al., Case No. 2-10-cr-01031-AHM-3, Dkt. No. 474 (C.D. Cal. Apr. 20, 2011).